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					                                               3.   Persons turning age 69 in 2003 must
YEAR-END TAX PLANNING                               mature their RRSP into cash, an an-                 IN THIS ISSUE
64(1)                                               nuity or a Registered Retirement In-
                                                    come Fund by December 31, 2003.             YEAR-END TAX PLANNING
                                                    Certain 2003 excess contributions           2003 REMUNERATION
                                                    may be deducted in the year 2004 if
                                                    contribution room is available.             EMPLOYMENT INCOME
                                               4.   If you own a business, consider pay-        BUSINESS/PROPERTY INCOME
                                                    ing a reasonable salary to family           CAPITAL GAINS AND LOSSES
Some 2003 year-end tax planning tips                members for their services rendered         CORPORATE TAX
include:                                            to the business.
                                                                                                PERSONAL TAX
1.   If the following expenditures are         5.   Ensure that all deductible alimony or
                                                    maintenance payments are made by            MARRIAGE BREAKDOWN
     made by individuals by December
     31, 2003 they will be eligible for             December 31, 2003.                          FARMING
     2003 tax deductions: moving ex-           6.   An individual whose 2003 net income         WEB TIPS
     penses, child care expenses, safety            exceeds $57,879 will lose all, or part,     GST
     deposit box fees, charitable donations,        of their old age security.
     political contributions and medical                                                        DID YOU KNOW...
                                                    Senior citizens will begin to lose their
     expenses.
                                                    income tax age credit if net income             prior to the yearend. This capital loss
2.   2003 eligible Registered Retirement            exceeds $28,193.                                may be offset against capital gains in
     Savings Plan (RRSP) contribution
                                                    Individuals facing these problems               the year, or in the three preceding
     amounts are noted on the 2002 per-
                                                    should contact their professional advi-         years.
     sonal income tax return assessment
                                                    sors for assistance in managing their      9.   If income in an inter vivos trust is to
     notices. You have until March 1,
                                                    2003 personal income.                           be taxed on a beneficiary's return, the
     2004 to make tax deductible RRSP
     contributions for the 2003 year.          7.   Consider purchasing assets eligible             income must be paid or payable to
                                                    for capital cost allowance before the           the beneficiary by December 31,
     Consider contributing to a spousal
                                                    yearend. For example, employees                 2003.
     RRSP to achieve income splitting in
                                                    may claim capital cost allowance on        10. Individuals may claim a tax credit
     the future.
                                                    automobiles, aircraft and musical in-          related to the interest portion of stu-
     The maximum 2003/2004 additions to             struments required to be used in their         dent loan payments made in 2003.
     deductible RRSP contribution room              employment.
     are $14,500 and $15,500 respectively.                                                     11. Registered Education Savings Plan
                                               8.   If you had taxable capital gains in the        (RESP)
      The 2004 contribution requires 2003
                                                    year, or any of the preceding three
     earned income of $86,111 ($86,111 x                                                            A Canada Education Savings Grant
     18% = $15,500).                                years, consider selling capital proper-
                                                    ties with an underlying capital loss            (CESG) for RESP contributions will
                                                                                                    be permitted equal to 20% of annual




     Tax Tips & Traps
2003 FOURTH QUARTER                                           ISSUE NO. 64                                                         PAGE 1
    contributions for children (maximum        16. A refund of Employment Insurance                 receipts subject to clawbacks, such as
    $400 per child per year).                      paid for non-arm’s length employees              old age security, the age credit, child
12. Health and dental premiums for the             may be available upon application.               tax benefits, GST credits, etcetera.
    self-employed                                                                              8.   Salary payments require source de-
    Individuals will be allowed to deduct      2003 REMUNERATION                                    ductions to be remitted to Revenue
    amounts payable in respect of the year                                                          Canada on a timely basis.
                                               64(2)
    for Private Health Service Plan cov-                                                       9.   Individuals that wish to contribute to
    erage in computing business income         Some general guidelines to                           the Canada Pension Plan or a Regis-
    provided they are actively engaged         follow in remunerating the                           tered Retirement Savings Plan may
    alone, or as a partner, in their busi-     owner of a Canadian-                                 require a salary to create "earned in-
    ness, and either self-employment is        controlled private corpora-                          come".
    their primary source of income or          tion earning "active business
                                               income" include:                                10. Salaries paid to family members must
    their income from other sources does                                                           be reasonable.
    not exceed $10,000.                        1.   In general, bonus down active busi-
                                                                                               11. Some provinces have "payroll taxes"
13. Tax on Split Income                             ness earnings in excess of the annual
                                                                                                   thereby increasing the costs of paying
                                                    business limit - $225,000 for a De-
    The Income Tax Act applies the                                                                 salaries versus dividends.
                                                    cember 31, 2003 yearend. Leaving
    maximum marginal tax rate to cer-
                                                    corporate active business income
    tain passive income of individuals
                                                    over this amount may present a tax         EMPLOYMENT INCOME
    under the age of 18.
                                                    deferral but there will likely be an
    This includes:                                  overall higher tax to pay when divi-
                                                                                               64(3)
     1.    Taxable dividends, and other             dends are finally paid out. Some           SPECIAL WORKSITE
           shareholder benefits, on                 companies may find it advantageous         An employer may make non-taxable
           unlisted shares of Canadian              to have greater than , say, $225,000       board and lodging payments to an em-
           and foreign companies (re-               of active business income because of       ployee at a special worksite.
           ceived directly or through a             other federal and provincial tax incen-
           trust or partnership); and               tives.                                     Caution!
     2.    Income from a partnership or        2.   Elect to pay out tax-free "capital divi-   In an August 14, 2003 Tax Court of Can-
           trust where the income is de-            dend account" dividends.                   ada case, the taxpayer was employed to
           rived from providing goods or       3.   Consider paying dividends to obtain a      work at a “special worksite” but, did not
           services to a business carried           refund of "refundable dividend tax         receive payments from the employer for
           on by a relative of the child or,        on hand".                                  his board and lodging. The taxpayer took
           of which the relative partici-                                                      the position that had he been paid these
                                               4.   Corporate earnings in excess of per-       amounts they would be tax-free. There-
           pates.
                                                    sonal requirements could be left in the    fore, the incurring of expenses related to
           Therefore, consider minimiz-             company to obtain a tax deferral.          this “special worksite” should be deducti-
           ing this type of income in               The effect on the "Qualified Small         ble.
           2003.                                    Business Corporation" status should
                                                    be reviewed before selling the shares.     Unfortunately, the Court did not agree.
14. The tax rate for higher income indi-
    viduals is now significantly lower on      5.   Dividends, as opposed to salaries, will    Editor’s Comment:
    capital gains than on dividends                 reduce an individual’s cumulative net      It may have been better to have part of the
    thereby presenting an incentive to re-          investment loss balance thereby pro-       remuneration paid separately as “board,
    ceive capital gains.                            viding greater access to the capital       lodging and transportation” expenses at
15. Canadian resident shareholders re-              gain exemption.                            the special worksite.
    ceiving shares in foreign tax-free re-     6.   Retaining income in the corporation
    organizations will be able to treat the         may effect provincial and federal          COMMISSION SALESPERSON
    shares as a reduction in adjusted cost          capital tax and certain provincial         In a July 14, 2003 Internal Technical
    base, as opposed to a taxable divi-             clawbacks.                                 Interpretation, CCRA concluded that a
    dend.                                                                                      commission salesperson may deduct in-
                                               7.   Excessive personal income affects




   Tax Tips & Traps
2003 FOURTH QUARTER                                           ISSUE NO. 64                                                        PAGE 2
ternet fees if the fees are paid to earn                                                      3.   The taxpayer paid salaries to other
                                              BUSINESS/PROPERTY INCOME
commission income. However, internet                                                               persons - a further indication of the
fees were not deductible by regular em-       64(4)                                                limited degree of control exercised by
ployees.                                                                                           the construction company.
                                              EMPLOYEE VS. INDEPENDENT
TIPS                                          CONTRACTOR                                      Editor’s Comment
In a June 30,                                 In a June 26, 2003 Tax Court of Canada          There are serious implications for the
2003 Tax Court                                case, the taxpayer was a “supervisor” with      payer if CCRA successfully challenges the
of Canada case,                               a construction company but filed his tax        “independent contractor” status. A CCRA
CCRA included                                 return as an independent contractor and         Ruling could be considered.
tip income on                                 deducted expenses accordingly. CCRA
the taxpayer’s                                argued that the individual was an employ-       CAPITAL GAINS AND LOSSES
return of $918 for 1993 and $4,785 for        ee and his deductions were restricted.
1994 rather than the $102 and $2,214 that                                                     64(5)
the taxpayer claimed were the actual          Good News!                                      GUARANTEEING
amounts of the tips. CCRA’s calculation       The Court found that the                        CHILD’S DEBTS -
was based on the taxpayer’s pro-rata per-     individual was an “inde-                        OUCH
centage of the tips received by the restau-   pendent contractor”, not an
rant based on her percentage of salary as                                                     In a June 10, 2003 Tax Court of Canada
                                              “employee”, and noted that:                     case, the mother had guaranteed the debts
compared to the total salaries paid. The
tips received by the restaurant were based    1.   Control Test - There was very little       of her son’s corporation. The son’s corpo-
on the average percentage of tips paid to          control over the services provided by      ration was unsuccessful and the mother
waitresses on sales at the restaurant of           the taxpayer - “Not once did they          paid off the loans over the years 1989 to
11.24%.                                            check to see if I was there, or told me    1993 and claimed business investment
                                                   to be there at any set time or date.”      loss deductions.
The Court agreed with CCRA and noted
that they found the taxpayer’s evidence       2.   Ownership of Tools - The taxpayer          The sole motivation for the guarantee was
evasive and did not discharge the onus of          owned his own hand tools, forms,           to help her son. No guarantee fee was
proving CCRA’s assessment incorrect.               scaffolding, and provided his own          charged and no possibility of income was
                                                   truck.                                     available.
INDIVIDUAL PENSION PLANS                      3.   Chance of Profit and Risk of Loss -        Therefore, the Court disallowed the moth-
(IPPs)                                             Even though the taxpayer had re-           er’s business investment loss on the basis
A 62 year old person who had been max-             sponded to a question from the field       that the guarantees were not incurred to
imizing RRSP contributions every year              auditor that he had, “no chance of         earn income.
established an IPP in his corporation for          profit”, upon investigation in Court, it
2003. The deductible corporate contribu-           was determined that he “wasn’t think-      Editor’s Comment
tions for 2003 are - past service $109,600,        ing properly” when he answered this        Charge a guarantee fee next time.
current service $22,400, for a total of            question. In fact, there was evidence
$132,000. For 2004 and 2005 the deduct-            that a profit or loss did apply in his
ible contributions are $24,100 and                 case.                                      CORPORATE TAX
$25,900 respectively. The deductible con-     4.   Integration - The taxpayer was pro-        64(6)
tributions will vary, depending on the tax-        viding the services as a person in
payer’s circumstances. These tax deducti-          business on his own account.
                                                                                              ASSOCIATION
ble contributions are considerably greater                                                    The Income Tax Act has rules that “asso-
                                              The Court was also influenced by:
than would be available with an RRSP.                                                         ciate” two corporations that have the
These Plans are complicated and require       1.   The wording of the actual contracts        same de facto control. Therefore, they
actuarial calculations. They are generally         between the construction company           have to share the small business deduction.
beneficial to individuals over age, say, 40        and the taxpayer.
earning a base salary of more than                                                            For example, if Mr. A and Mrs. A each
                                              2.   The taxpayer had income from other         own a corporation and there is no signing
$100,000.
                                                   sources in previous years.                 authority, or business transactions, or
                                                                                              shareholdings between the two corpora-




   Tax Tips & Traps
2003 FOURTH QUARTER                                          ISSUE NO. 64                                                        PAGE 3
tions, it is arguable that the companies are   taxpayer moved and, because of employ-         children and successfully claimed a medi-
not associated. Therefore, the family          ment commitments, the spouse joined the        cal expense credit of $42,662.
could have two small business deductions.      taxpayer three years later. Therefore,
                                                                                              A doctor certified that the children re-
                                               three years after the change of employ-
The corporations should strive for sepa-                                                      quired the equipment, facilities and per-
                                               ment, the old house was sold and the tax-
rate and distinct financing, customers,                                                       sonnel specially provided by this Acade-
                                               payer successfully deducted the selling
employees, offices, business licenses,                                                        my.
                                               cost as a moving expense.
Workers Compensation registration, GST
registrations, CPP and EI and source de-                                                      INTEREST ON A STUDENT LOAN
                                               MEDICAL EXPENSE - HARDWOOD
duction registration and any other stand-      FLOORING                                       Interest paid on a student loan made un-
alone issue.                                                                                  der the Canada Student Loans Act or a
                                               In a June 17, 2003 Tax Court of Canada
                                                                                              provincial statute is eligible for a tax cred-
Professional advice is needed in this area.    case, the taxpayer incurred expenses of
                                                                                              it.
                                               approximately $11,000 in 1999 to install
DISSOLUTION FOR FAILURE TO                     hardwood flooring which was successfully       In a June 27, 2003 Tax Court of Canada
FILE ANNUAL RETURNS                            claimed as a medical expense. The floor-       case, the taxpayer took out a “new loan”
In a June 10, 2003 Tax Court of Canada         ing was acquired because the taxpayer’s        to repay a loan subject to the Canada Stu-
case, the corporation was struck in the        spouse suffered from serious allergies.        dent Loans Act.
late 1980s for failing to file Annual Re-      The doctor noted that, “because of signifi-
turns but was revived in February, 1999        cant health impairment... the spouse was       Bad News!
under an Application                           unable to be functional in his home until      The interest on the “new loan” is not eli-
for Revival.                                   the carpets were removed and replaced          gible for the tax credit.
                                               with hardwood...”.
Bad News!
                                               MEDICAL EXPENSES -                             MARRIAGE BREAKDOWN
The Court noted that
the Certificate of                             ATTENDANT CARE                                 64(8)
Revival did not have                           In a July 3, 2003 Technical Interpreta-
the effect of reviving the corporation ret-    tion, CCRA notes that where a senior citi-     RRSP TRANSFER
roactively. The corporation was simply         zen pays for various homecare services,        The Income Tax Act permits a tax-free
non-existent at this time. The income          such as meal preparation and laundry, the-     transfer of an RRSP from one spouse to
earned belongs to the owner who generat-       se expenses could qualify as “attendant        another as a division of property in a “set-
ed that income through his activity.           care expenses” and be eligible as medical      tlement of property or support rights” in a
                                               expenses if the taxpayer is entitled to the    marriage breakdown.
PERSONAL TAX                                   disability tax credit. Only attendant care
                                                                                              RETROACTIVE CHILD SUPPORT
                                               expenses that do not exceed $10,000 for
64(7)                                          the year ($20,000 in the year of death)        The British Columbia
                                               qualify for the credit.                        Supreme Court recently
DISABILITY TAX CREDIT (DTC) -                                                                 required Mr. G to pay a
NEWBORN                                        Depending on the situation, eligible tasks     retroactive child care
In a July 9, 2003 Tax Court of Canada          could include meal preparation, house-         payment of $641,842
case, the taxpayer’s son was born on No-       work, transportation, and personal services    ($3,565/mo. for 15 years) because he did
vember 27, 1993 without a left hand. The       such as banking and shopping. However,         not fully disclose his wealth and income
Court found that a missing left hand is a      attendant care expenses would not normal-      when the original $500/month child sup-
disability that qualifies for the DTC trans-   ly include a payment to a person employed      port agreement was made.
fer to the parent.                             to do a specific task, such as a drycleaner.

MOVING EXPENSES                                MEDICAL EXPENSE - SCHOOL                       FARMING
                                               TUITION FEES
In a June                                                                                     64(9)
12, 2003                                       In a July 8, 2003 Tax Court of Canada
Technical                                      case, in the year 2000 the taxpayer paid       GRAVEL SALE
Interpreta-                                    tuition fees and room and board to an          In a 2003 Advance Income Tax Ruling,
tion, CCRA reviewed a situation where a        Academy for his two attention deficit          CCRA Ruled that where a farm corpora-




   Tax Tips & Traps
2003 FOURTH QUARTER                                          ISSUE NO. 64                                                          PAGE 4
tion owns land with gravel, when the cor-                                                         allowances to each of its employed vehicle
                                                WEB TIPS
poration sells all the gravel for a lump                                                          salespersons. The Excise Tax Act permits
sum the proceeds received will be a capi-       64(10)                                            an ITC of 7/107th of the reasonable al-
tal gain not regular income. Capital gains                                                        lowances paid.
are only 50% taxed.                             USED CAR VALUATION
                                                http://www.gmcanada.com/english/financi           Good News!
However, in an August 29, 2003 Tech-            ng/fin_financ.html                                The Court found that the allowances were
nical Interpretation, CCRA note that                                                              based on kilometres driven and were rea-
where an individual receives an amount          If you are looking for values of used vehi-
                                                                                                  sonable.    Therefore, the ITCs were
based on the shale extracted from the           cles, this site is perfect for you. On the left
                                                                                                  allowed.
property, the amount received will be con-      hand column of the website is a link
sidered income because it is based on pro-      named “Appraise Your Vehicle” that will           INPUT TAX
duction.                                        take you to the “Canadian Black Book”             CREDITS
                                                valuation tool.
                                                                                                  In a January 15,
SALE OF TREES
                                                                                                  2003 Tax Court
In a July 22, 2003                              GST                                               of Canada case, the taxpayer carried on a
Technical Interpre-                                                                               courier proprietorship business. CCRA
tation, CCRA notes                              64(11)                                            successfully disallowed some of the input
that where a farmer                                                                               tax credits on the basis that the taxpayer
                                                AGENCY
receives an amount                                                                                did not keep a log for the use of his vehi-
for allowing someone to cut and remove          GST is payable on the selling price when a
                                                person is acting as an agent in making a          cle or receipts for his entertainment ex-
timber from his/her farm, the gain on the                                                         penses.
sale may be a capital gain, not regular         sale on behalf of a supplier.
income, if all of the following conditions      On August 18, 2003 CCRA introduced 17-
are satisfied:                                  page Publication P-182R - Agency which
                                                                                                  DID YOU KNOW...
(a) the taxpayer did not acquire the            discusses this. It also provides four ex-         64(12)
    property with the intention of selling      amples.
                                                                                                  ADMINISTRATIVE MONETARY
    the timber or land;                         Example 1 reviews a property manage-              PENALTY SYSTEM (AMPS)
(b) the sale agreement is an isolated           ment company which manages a number
                                                                                                  The AMPS system was fully implemented
    transaction;                                of residential apartment buildings for vari-
                                                                                                  by CCRA on October 7, 2002 to assess
                                                ous landlords. Example 2 reviews a cost-
(c) the price is a fixed amount;                                                                  penalties for non-compliance with Cus-
                                                sharing arrangement where three profes-
(d) the timber is removed over a short                                                            toms laws. These penalties are signifi-
                                                sionals share office space and operating
    period of time; and                                                                           cantly higher than previous.
                                                expenses. Example 3 and 4 reviews a
(e) the purchase price does not depend          contract which includes a reimbursement           A non-compliant taxpayer could face in-
    on the use or production of the land.       of expenses.                                      creased monetary penalties, increased
                                                                                                  audit activity, inspections and seizures, as
                                                INPUT TAX CREDITS (ITC)-                          well as loss of importing privileges.
                                                MILEAGE ALLOWANCES
                                                                                                  CCRA’s Voluntary Disclosure Program
                                                In a July 22, 2003 Tax Court of Canada
                                                                                                  will allow importers to come forward and
                                                case, Melville Motors Ltd. paid mileage
                                                                                                  avoid AMPS penalties.




           The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances
           and exceptions in a commentary such as this, a further review should be done. Every effort has been made to ensure the
           accuracy of the information contained in this commentary. However, because of the nature of the subject, no person or
           firm involved in the distribution or preparation of this commentary accepts any liability for its contents or use.




   Tax Tips & Traps
2003 FOURTH QUARTER                                            ISSUE NO. 64                                                           PAGE 5

				
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